Efficient indirect regulation under Protection for Sale
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Regulatory intervention is necessary to overcome market failures. However, this kind of intervention may also create Protection for Sale conditions in the market—which might, in turn, lead to an inefficient resource allocation. This paper examines the effect of an indirect intervention on regulated market welfare under Optimal Regulation and Protection for Sale conditions. Although under Optimal Regulation conditions there is zero welfare-loss as it derives from Differential Price Policy (DPP), it seems that under substantial Protection for Sale conditions this price policy increases the welfare-loss, and therefore a Uniform Price Policy (UPP) might achieve a smaller welfare-loss—due to the “free-riding” effect. Furthermore, this paper suggests that in between these two price policies lays a third option, a Combined Price Policy, that can balance between the accurate resource allocation (DPP) and the political pressure reduction (UPP) in order to reduce the welfare-loss and to increase the market efficiency.
KeywordsProtection for Sale Free-riding Menu-auction Regulatory policy
JEL ClassificationD61 D72 H42 L78
The author thanks Prof. Israel Finkelshtain and Dr. Iddo Kan for their guidance. Moreover, the author thanks the anonymous referees for their helpful comments. The research in this paper was partially sponsored by a Graduate Scholarship from the Hebrew University of Jerusalem.
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